IPOs generate a lot of interest among investors. In this year, we have already seen more IPOs than the entire year of 2020. After the Zomato IPO frenzy, investors are looking forward to Paytm, MobiKwik and other IPOs that will hit the market in 2021.
Do you want to invest in IPO? Here are some aspects that you may look at before investing in IPO.
The stock market, including the primary market, experiences its ups and downs. But as several IPOs hit the market, there may be a few rotten eggs as well. So, it is best not to speculate on all the IPOs hitting the markets. Instead, be selective and choose wisely. Try focusing on businesses that you genuinely believe in or companies that have the potential to deliver excellent results in the future.
It is still riskier
Do you think investing in an IPO is safer because you are buying shares from the company or at a discount? Then think again.
Investing in an IPO can be riskier than investing in the secondary market. The first reason is that the information publicly available for a company hitting the primary market is way less than the information and data that we can find about the already listed companies. The second reason is that the company’s performance will depend mainly on the current market situation, making it highly risky.
We see IPOs give better returns when the equity markets are optimistic and vice versa.
Do your analysis
Investing in IPOs is a common topic of discussion among colleagues. But that doesn’t mean that you can invest in IPO by listening to your colleagues who make you believe that they have continuously gained at least 100% by investing in an IPO.
As it can be a risky investment option, you must carry out analysis without being biased.
Quality of promoters and key management team, future projections of the industry, and positioning of the company within the sector are essential factors that you need to consider.
If you don’t have the skills to analyse a company, look at the research reports published by reputed research firms.
Firms with weak fundamentals, high-priced fundamentally strong companies, and reasonably priced fundamentally strong companies are the three types of companies that typically employ the IPO method. Another aspect that you need to focus on is the company’s valuation.
It is best to compare the company’s valuations with listed peers and invest in the IPO if it is available at a discount.
The reason behind going public
The next point for investors is to find out the company’s reasons for going public.
It is a matter of concern as many venture capitalists (VCs) and private equity investors (PEs) rely on IPOs to exit their investments and generate a handsome profit.
Existing investors exiting the company in the secondary market is not a good sign.
Many individuals tend to sell their shares after the IPO gets listed. If the company has the potential to generate high returns over the long term and you sell your shares, you may not be able to gain from the long-term performance of the stock.
Investing in IPO can give attractive returns if you select the right IPO and stay invested for the long term. This article has considered the six scenarios that you need to examine before investing in an IPO.